Commercial Loans Blog

Commercial Loan Gossip, History, and New Developments

Posted by George Blackburne on Thu, Mar 28, 2013

Our private money commercial mortgage company lost a $975,000 commercial loan this week to a credit union, of all lenders!  This crazy credit union wrote a 5% loan with no appraisal and no toxic report.  That's insane!

Every decade or so a new class of commercial lender enters the market and starts making goofy commercial loans.  Most recently it was the conduits who were making 82% loan-to-value commercial loans, with a two-year interest-only period before the loan started to amortize, all based on projected rents.  Absolute lunacy!  Not surprisingly, almost 9% of all conduit commercial loans are now in default.

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Before the conduits, the S&L's were making huge commercial construction loans on new office buildings with no pre-leasing.  Not surprisingly, the country ended up with a lot of empty, "see-through" office towers.  The country also got to bail out the whole S&L industry.

Before that, it was a small group of industrial loan companies acting like crazy people.  Back in the 1980's, the State of California allowed the formation of a new class of tiny bank-like entities called thrift and loan associations.  (Be careful here not to confuse a thrift and loan association with a  "thrift", which is a slang term for a savings and loan association.)

This was back in the days before Reg Q was replealed.  Regulation Q limited the interest rate that banks and S&L's could pay on federally-insured deposits.  For example, the Fed might say that the highest rate on deposits that a bank could pay was 4.0%.  Savings and loan associations could pay 0.25% higher on deposits, but those deposits were tied up in a CD.  Therefore, Home Savings, for example, could pay 4.25%.

Thrift and loan associations were only licensed to accept deposits in California, but they could (eventually) make commercial loans nationwide.  Since their deposits were only insured by a state fund, rather than the FDIC, they offered even higher rates of interest on deposits, say 6% in a 4% CD market.

For 15 to 20 years, all was good.  These thrift and loan associations wrote fairly conservative loans, and they paid their depositors the promised 6% interest rate.  But then a few of the owners started to get greedy.  They started to make poor-quality commercial loans at outrageous interest rates.  I am talking about commercial real estate loans that would terrify even an experienced, commercial hard money broker.  In some cases, the APR's charged by these thrift and loan associations exceeded 24%!

Not surprisingly, the loans went bad.  Several of the thrift and loans became insolvent.  Their losses soon used up the entire state deposit insurance fund, so a run on the solvent, well-run thrift and loan associations began.  The governor declared a thrift and loan holiday.  The weak thrift and loans were dissolved, while several of the well-run thrift and loans were allowed to change their charters to become "Federal Savings Banks".  The new charter allowed them to obtain FDIC insurance, and a few of these these well-run thrift and loans actually survived.

Now we get to the point of today's blog article.  Every decade a new class of stupid commercial lender enters the marketplace.  This decade the new idiot on the block is the credit union.  These new guys don't know what they are doing - like making a $975,000 commercial loan with no appraisal and no toxic report.  Mark my words, within seven or eight years the credit union industry will take immense losses in commercial real estate lending.

But if you are a borrower or a commercial mortgage broker, do you really care?  Maybe not.  If these guys are idiot enough to make such high-risk commercial loans, why not bring them some loans?

So where can you find some credit unions making commercial loans?  C-Loans.com has a number of participating credit unions.  And let me make one final point.  It's actually smart of the credit union industry to start making commercial real estate loans.  The banks are leaving too many good deals on the table.  But hey, at least get an appraisal and toxic report.  Geesch!

 

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The Commercial Loan Shipwreck That Never Materialized

Posted by George Blackburne on Sun, Mar 24, 2013

The year 2012 was supposed to have been a total diaster for commercial real estate loans.  Almost $151 billion worth of multifamily and commercial real estate loans were scheduled to mature during 2012, just five years after the insane underwriting year of 2007.

During the heady and insane underwriting months of 2007, some conduits and money center banks were making five-year commercial loans of up to 75% to 80% loan-to-value ... based on projected rents!  A number of these commercial loans were given a one year or two year interest-only period, before the loan started to amortize.  A few crazy conduits even wrote deals up to 82% loan-to-value, and I know that a handful of conduit commercial loans were written up to 82% LTV, with an interest-only period of two-years, all based on projected rents!  Its no wonder that many experts expected a shipwreck in 2012, when these five-year, conduit-style commercial loans matured.

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But a funny thing happened in 2012.  Commercial real estate loan (CMBS) delinquencies actually declined from a high of around 9% at the beginning of the year to just 8.7% in the fourth quarter of 2012.  Every quarter of 2012 the delinquency rate declined.  It's no wonder that confidence has returned to the commercial real estate mortgage bond market.

So what happened?  New commercial real estate construction during the Great Recession came to a complete halt.  With no new buildings coming on line, there was less competion for tenants.  The commercial properties securing most conduit loans were also larger, better-located, better-managed, and more desirable than the typical small commercial property.  Occupancy rates for conduit-quality commercial properties held up surprisingly well. 

As Treasury bond yields plummeted, real estate investors became desperate for yield.  Cap rates compressed, and many commercial properties, those that were well-leased, actually saw some appreciation.  Finally, property owners were forced to become more efficient.  Costs declined and net operating incomes actually improved.

In the end, most commercial real estate owners were able to either refinance their ballooning loans in 2012 or sell them for more than what they owed on the property.

How does the future look for commercial real estate loans?  It looks excellent.  Almost $151 billion in commercial real estate loans matured in 2012.  According to the Mortgage Bankers Association, less than $120 billion in commercial real estate loans are scheduled to mature in 2013.  Even fewer commercial loans will mature in 2014.  The years 2015, 2016, and 2017 will be a bit more challenging, as the ten-year loans written in 2005, 2006, and 2007 finally mature.  With no new commercial construction going on, however, the challenge should be quite manageable.

Bottom line:  The crisis in commercial real estate financing is arguably over.  There will probably be no new flood of commercial real estate foreclosures.

 

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Topics: Commercial Loan Shipwreck

Commercial Loans and Asset-Backed Securities

Posted by George Blackburne on Wed, Mar 6, 2013

There are two kinds of commercial mortgage-backed bonds. The most popular kind is a standard conduit deal, known as a commercial mortgage-backed security ("CMBS"). A typical CMBS deal is a $6 million first mortgage on an attractive office building that is only 63% LTV in some primary market, like Washington, D.C. or New York City. Please click here if you need a CMBS loan.

A less-well-known kind of commercial mortgage-backed bond is an Asset-Backed Security (ABS) that happens to be backed by subprime commercial mortgages. You can think of these subprime commercial mortgages as less-than-perfect or hard money quality deals.

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Each subprime commercial mortgage in the typical Asset-Backed Security portfolio has some sort of black hair.  Maybe the lease is short term.  Maybe the property has some vacancies.  Maybe the LTV is higher than the 63% that most CMBS lenders will allow.  Maybe the borrower has less-than-perfect credit.  There will always be some black hair.

Now main characteristic about an ABS offering is that the lender will accept several different types of loans into the portfolio - typically scratch-and-dent residential loans, subprime commercial loans, car loans, and credit card loans.  The theory behind an ABS offering is that the end bond investors enjoy more diversification.  Not all of their investment is backed by car loans or commercial real estate loans.  Maybe commercial real estate is depressed but car loans are paying like a slot machine.

Another important characteristic about ABS bonds is that they typically offer 2% to 2.5% higher yields than CMBS bonds. You find a number of subprime commercial lenders here.

Here's the point of this article:  Yield-starved bond investors absolutely love bonds backed by commercial mortgages right now - even ABS bonds. This is very, very bullish for the future of commercial real estate lending ... and ultimately commercial real estate values.


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Topics: Asset-Backed Securities

Commercial Loans, Bad Boy Acts, and Carve-Outs

Posted by George Blackburne on Tue, Mar 5, 2013

Yesterday I wrote a blog article explaining that if you buy a commercial property with your IRA, and you get a commercial mortgage loan from the bank to help you finance the purchase, you need to get the bank to make you a non-recourse loan (good luck with that).  If you don't, your IRA investment constitutes a prohibited transaction.

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A non-recourse loan is one where the bank cannot come back after you personally for a deficiency judgment if they foreclose and take a loss.

I pointed out in my article yesterday that few banks will make non-recourse loans these days.  Fortunately Blackburne & Sons would be happy to make a non-recourse commercial real estate loan to your IRA.

Okay, but then a question came up.  What about a carve-out clause?  A carve-out clause is a provision in a non-recourse loan that says if a borrower commits certain Bad Boy Acts that the commercial loan suddenly becomes a full-recourse loan.

So what is a Bad Boy Act?  Bad Boy Acts include the following "bad-boy" behaviors:

(i) fraud or intentional misrepresentation by the borrower (you lie to the lender to get the loan in the first place); (ii) waste occurring to or on the mortgaged property (you take a sledgehammer to the property right before you lose it in foreclosure); (iii) gross negligence or criminal acts of the borrower that result in the forfeiture, seizure or loss of any portion of the mortgaged property (you set up a meth lab in the property and the government seizes the property); (iv) misapplication or misappropriation of rents, insurance proceeds or condemnation awards received by the borrower after the occurrence and during the continuance of an event of default (you steal the insurance proceeds check); and (v) any sale, conveyance, mortgage, grant, bargain, encumbrance, pledge, assignment or transfer of the mortgaged property, or any part thereof, without the prior written consent of the lender (you put a second mortgage on the property even though the loan documents specifically forbid it).

So here's the question?  Can a non-recourse loan to an IRA have a carve-out provision?  The answer is that no one knows for sure.  The IRS has yet to litigate it.  My personal opinion is that the IRS would probably NOT declare a non-recourse mortgage loan to be a prohibited transaction simply because it contains a few standard carve-outs.

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Topics: Bad Boy Acts

Commercial Loans, IRA's, and the Personal Guaranty Issue

Posted by George Blackburne on Mon, Mar 4, 2013

Let's suppose you have a self-directed Individual Retirement Account, and you are very bullish on commercial real estate (see my previous blog article).  Let's further suppose that you find an attractive $200,000 industrial condominium in a primary market (say San Jose, California or Austin, Texas).  You decide to buy the industrial condo with your IRA and lease it out to some independent third party.

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So you go down to the bank and apply for a $130,000 new conventional commercial first mortgage loan.  You plan on putting down $70,000 (35%) from your IRA.  The bank comes back with an approval on your loan, subject to, of course, your personal guaranty.  All is good and right in the world.

Oops.  Did you know that if you personal guaranty your IRA's loan, it constitutes a prohibited transaction?  Yup.  You can't do it.

Okay, so what do you do?  Simply ask your bank to waive the personal guaranty requirement.  Uh-oh.  Your commercial bank will probably say no.  Banks have always been reluctant to make non-recourse loans - meaning they cannot go back after you for a deficiency judgment.  And since the Great Recession, they are even more reluctant.

Here's one solution.  Apply to Blackburne & Sons's Realty Capital Corporation.  As a private money lender, we will gladly make you a non-recourse loan.

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Topics: IRA's and Personal Guarantees